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Strong demand to continue propelling Russian wheat prices higher


Strong ruble supporting dollar prices

Adverse weather seen cutting supply estimates

Russian farmers holding back supply

New York — The ongoing rally in Russian wheat prices is set to continue amid strong demand, weather-driven expectations of lower crops in key exporting countries, and Russian farmers holding back supply as the ruble appreciates.

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Russian wheat prices have been rallying since September, tracking the international market. S&P Global Platts assessed Russian 12.5% protein wheat FOB deep sea at $233.25/mt on Wednesday, an 11-month high.

Support came from higher origination costs, driven primarily by an 8% appreciation in the ruble against the dollar since September and farmers holding onto grain. Rising origination costs resulted in liquidity drying up on the Russian FOB market.

"There are not many Russian sellers nowadays. Replacement is at about the mid-$230s level," A Europe-based broker said.

The lack of liquidity in the Russian FOB market reinforced the rally as "squeezed traders have to cover [their short positions]", another trader said.

Production perspectives

Unfavorable weather in the southern hemisphere and parts of the northern hemisphere have meant a cut in 2019-20 production estimates for major exporting countries such as Argentina, Australia and, most recently, Russia.

"Argentina and Australia cut production expectations on dry weather so it will create additional demand," said Elena Neroba, market analyst, Maxigrain.

Australia was hit hard by dry weather in 2019, which resulted in a cut in its 2019-20 (October-September) wheat output estimate to 15.6 million mt in January from 22.5 million mt in May by the US Department of Agriculture.

USDA has also lowered Argentina's wheat production forecast for 2019-20 (December-November) gradually since May, by 1.5 million mt to 19 million mt in January.

USDA, in its latest report in January, has also revised down Russian wheat production and exports by 1 million mt for the 2019-20 season to 73.5 million mt.

At the same time, the EU harvested 154 million mt in 2019/20 marketing year, a 13% increase. As a result, the exports may reach 31 million mt according to USDA, a 33% increase.

Ukraine has also already exported around 15.27 million mt so far in 2019-20, up over 35% year on year, according to government data, and the USDA estimates there are around another 5 million mt left to be sold until the end of the season.

However, a Dubai-based trader said that might not halt the rise in prices. "The timing is perfect for the rally to continue. January is not usually a month where Russian farmers sell their crop. They can see prices increasing and they normally sell on the break and probably want to look at the new crop situation too [before selling]."

Russian wheat prices could potentially benefit from the slower pace of exports during this marketing season, as wheat from other origins dries up after aggressive selling in the first half of the 2019-20 season, sources said.

Destination demand

Other sources pointed to unexpected demand also continuing to surprise the market, with Pakistan -- previously a wheat exporter -- saying Monday it was coming to the market for 300,000 mt of wheat on tight flour supply, and Argentinian export tariffs nearly doubling following a change in the political landscape, as well as higher than expected Chinese and Iranian demand.

A flurry of international wheat tenders by major importing countries over the past several weeks has also lent support to global wheat prices, as Algeria, Egypt, and Turkey, among others, consistently pay higher prices for their purchases.

Since the beginning of December, Egypt's state grain importer GASC has purchased over 1 million mt of wheat out of a total of 5.2 million purchased since the beginning of the 2019-20 marketing season, with average C&F prices paid at the latest tender on January 14 some 6%, or $13.56/mt, higher than its tender on December 3.

Turkey state grain importer TMO -- one of Russia's biggest wheat export markets -- was also in the market for 550,000 mt on January 14, to take its Russian imports to 4.2 million mt since the beginning of the 2019-20 marketing season, according to Russian agency APK-Inform data Tuesday.

"TMO's purchasing levels were higher than expected. I think the market became very supportive after the announcement of the tender results," a Turkish trader said.

An Algerian tender by state grain importer OAIC Tuesday saw it buy an 450,000 mt of wheat at an average price of $245 C&F, sources said. That was $17/mt or 7.5% higher than its previous tender on December 5 when it booked 500,000 mt at an average $227-$228/mt, according to traders.